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Contributors TED Spread Says Banks are getting Spooked Again!
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The TED spread is an indicator that shows if banks trust each other or not.

It’s an indicator of perceived credit risk in the general economy. You see, T-bills are considered to be risk-free (which is really a joke too…but that’s what they say)…and the LIBOR (London Interbank Offered Rate) reflects the credit risk of lending to commercial banks.

When the TED spread increases, it’s a sign that lenders believe the risk of default on interbank loans is increasing. In other words, they fear the counterparty can’t make good on their end of the bargain.

Therefore, lenders demand a higher rate of interest for the higher degree of risk that they perceive.

Check out the 3-year chart of the TED spread below. The last time it went nuts, we had the credit crunch and the collapse of Lehman. And here we are once again…with the TED spread moving higher by the day yet again!

I’ve always said, when I’m flying in a plane, I’m not worried unless I see the stewardesses worried because they fly all the time.

Well, I’m typically not too worried about things out there until I see if the bankers are worried. Once they get worried (as shown by the TED spread), then its time to get a bit concerned ourselves.

Once the TED spread gets above 50 basis points, banks can panic and that spread can skyrocket. When it does, the liquidity can dry up and you’ve got another credit crunch on your hands…only this time the world is in worse shape than last time when the credit crunch started.

So buckle up your seat belts. The markets may be in for a bumpy ride. Thankfully though, there’s always a trade to make in the currency market in “up” or “down” stock markets.

In fact, when stocks dive, there can be some of the greatest currency gains to be had at those times. So make sure you have a currency trading account opened up. The defensive currencies can really soar during these times.

Sean Hyman

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